Arthur J Thomas v. Minister of National Revenue, [1977] CTC 2227, 77 DTC 171

Delmer E Taylor:—This is an appeal resulting from an income tax reassessment for the year 1974, but only indirectly related to it. The appellant, after having been reassessed on certain points for that year, submitted that he should be allowed an amount of $4,492.32 for interest expense not previously claimed as a deduction in the preparation of his income tax return. The Minister of National Revenue refused to allow the deduction and the appellant filed a Notice of Appeal with this Board. It was not clear from the documentation available if there had ever been a question of the right of the taxpayer to claim the amount, or whether the appellant had attempted to resolve the matter by filing a Notice of Objection with the Department. However, both the appellant and the respondent relied, inter alia, upon section 3 and paragraph 20(1)(c) of the Income Tax Act, SC 1970-71-72, chapter 63 and amendments thereto, and agreed that the appeal proceed.

Facts

The appellant during the year in question was a major shareholder and a senior manager in a stockbrokerage firm, McEwen Securities Limited, Toronto, Ontario (hereinafter referred to as “McEwen”). His entire income that year, with the exception of $720 in family allowances and $500 from interest on investments, added in the relevant reassessment, was derived from McEwen as “‘salary or wages” and reported on a regular T4-1974 form as $90,614.66. A certificate from the Bank of Montreal, King Street, Toronto, Ontario, was available, certifying that the appellant had paid in the year in question the amount of $4,492.32 as interest on loans from that bank.

Contentions

The appellant contended that the amount claimed was paid “on loan advances” against his debt and equity holdings in McEwen in 1974.

The respondent asserted that:

(a) at all material times, the appellant was employed as a security salesman remunerated on a commission basis by McEwen Securities Limited;

(b) the appellant was not under a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property; and

(c) the appellant was not under a legal obligation to pay interest on an amount payable for property acquired for the purpose of gaining or producing income therefrom.

Evidence

The appellant gave evidence and, during direct examination by his agent and cross-examination by counsel for the respondent, identified and filed the following documents:

Exhibit A-1—Photocopies of two Bank of Montreal Demand Loans ledger sheets for 1974.

Exhibit A-2—Letter from Bank of Montreal dated April 14, 1977, giving additional information regarding the loan accommodation provided to the appellant.

Exhibit R-1—List of shareholders of McEwen as of March 31, 1974, with several attachments.

In brief, the appellant stated that for several years prior to his investment and involvement in McEwen, he had been a shareholder, senior manager and securities dealer with another firm, F H Deacon Ltd, also of Toronto, Ontario (hereinafter referred to as “Deacon”). He had maintained a fluctuating bank loan, the security for which was his investment in the shares of Deacon. It had been the practice of Deacon not to specifically issue the company shares to individuals but, to the knowledge of the appellant, the bank had accepted in lieu of the deposit of his shares, a letter from Deacon stating that the bank would be informed in advance of any proposed change in ownership or status (particularly a sale) of his shares in that company. Exhibit A-2 is reproduced hereunder:

TO WHOM IT MAY CONCERN

We have accommodated Arthur J Thomas, Esquire, a good customer since 1949, with various loans over the years. As records do not go back beyond 1970 we will comment on the period from 1970 to the present.

On August 21, 1970 we authorized a loan of $52,000, funds from which were utilized for investment in F H Deacon & Co Ltd, Rampart Securities Ltd and Cerro Corp. This loan was subsequently reduced in 1971 and the accommodation fluctuated between $21,000 and $39,000 until 1972 when the accommodation was set at $30,000. The loan remained in that amount until payout November 29, 1976.

In addition to the foregoing, we assisted Mr Thomas to the extent of $30,000 for a short tenure in 1974 for purchase of additional shares and debentures of McEwen Securities Ltd.

(Signature)

D E MacFarlane,

Credit Officer.

There was some information brought out during cross-examination that the appellant had been involved at certain times with other business dealings, none very successful. In late 1973 the appellant had transferred his interest and base of operations from Deacon to McEwen and this required, according to regulations, that he be a shareholder in McEwen. A special loan, for a short period, of a further $30,000 was negotiated with the same bank and this, together with the realization on his investment in Deacon, permitted him to acquire his sharehold- ings and position in McEwen. These transactions were completed by the early spring of 1974. The appellant agreed with counsel for the respondent that neither his investment in Deacon nor that in McEwen had produced “dividends” in the strict sense of the word. Under questioning by the presiding Member of the Board, the appellant stated that he had little in the way of personal assets (other than a modest home) and that this situation had obtained during all the years covered by the bank loans in question.

Argument

The agent for the appellant pointed out that this was his first appearance before the Board and, to that degree, he had not been fully aware previously of the information which could be useful and acceptable. Nevertheless, his position was that the letter from the bank (Exhibit A-2) did give sufficient evidence of the investment of the funds and the liability from which the interest expense did originate. He contended that the appellant met the qualifications required for the deduction to be allowed.

Counsel for the respondent referred to the inadequate support provided by the appellant for the case, the lack of dividends from McEwen and the inability of the appellant to show a continuous line of investment from the bank loans to Deacon and then to McEwen. Counsel submitted to the Board the following cases:

Murray v MNR, [1950] CTC 7; 4 DTC 723 (Exch);

Kanally v MNR, [1971] Tax ABC 99; 71 DTC 92;

Beech v MNR, [1976] CTC 2175; 76 DTC 1134.

Findings

The Board wishes to turn first to the general question of the claim for $4,492.32 before dealing with the specifics of the appeal. During the course of the hearing both parties agreed that if any claim were valid at all, the mathematics supported a claim of $3,720.81, not of $4,492.32. The Board, after reading the documentation, concludes that the amount of $3,720.81 should be the one at issue. With regard to its admissibility at all, although the matter was not vigorously pursued by counsel for the respondent, the Board considers it prudent to restate the basis for the appeal. The amount involved ($3,720.81) is nowhere referred to in the appellant’s income tax return for the year 1974. The agent for the appellant, Mr W E Crawford, a chartered accountant, stressed the point that there was nothing to prevent the appellant from filing at a later date for additional tax relief. Counsel for the respondent did not respond to this issue, and the Board is therefore unaware of a time limit or any other reason which would act to bar the appellant from seeking to avail himself of a legitimate deduction. Although the formal departmental Notice of Objection stage for this appeal was not followed, the Board considers that the documentation places the matter within the jurisdiction of the Board under the provisions of paragraph 165(3)(b) of the Act which are as follows:

165. (3) Upon receipt of a notice of objection under this section, the Minister shall,

(b) where the taxpayer indicates in the notice of objection that he wishes to appeal immediately either to the Tax Review Board or to the Federal Court and that he waives reconsideration of the assessment and the Minister consents, file a copy of the notice of objection with the Registrar of the Tax Review Board or in the Registry of the Federal Court, as the case may be,

and he shall thereupon notify the taxpayer of his action by registered mail.

The physical evidence available to the Board is scant indeed, and that which is available is not of great substance. It is obvious that a more complete summary and analysis of the financial affairs of the appellant for the year in question and for a period of time immediately prior thereto would have been of considerable value in supporting his contention that the principal funds in question were utilized solely for investment first in Deacon and then in McEwen. Nothing was submitted to the Board to show the precise nature of the investment in either company (whether in shares, assumption of debt or some other form), although the evidence of the appellant was that he did obtain substantial direct shareholdings; and there was no evidence to eliminate the possibility of the funds in question, a total of some $60,000, having been used either personally, or in Rampart Securities Ltd or Cerro Corp (the two companies referred to in Exhibit A-2). The responsibility for this kind of presentation rested solely with the appellant and, although the Board recognizes that the hearing might have been unfamiliar surroundings for both the appellant and his agent, this direct onus was discharged in only the most minimal way by the submission of the bank ledger card and a rather general bank letter not directly touching on the major subject matter of this appeal. The appellant and his agent accordingly placed the outcome of this appeal at considerable risk.

Nevertheless, the Board has reviewed the statements of the appellant and the assistance provided to the Board by Mr Crawford in elucidating, through questioning, some of the background data which it became evident was material to this appeal. This oral testimony of the appellant is regarded as credible and is accepted as the only plausible explanation for not only the continuation of the original $30,000 loan but also for the negotiation of the second loan for a like amount. The appellant’s present investment in McEwen would appear to be well in excess of the total of the borrowed funds and the rewards were substantial and immediate—some $90,000 in salary in 1974 alone. The Board also accepts the appellant’s verbal explanation regarding the company policy at McEwen—to remunerate the security sales agents by salary and commission rather than by dividends. Taken in conjunction with his statements that he needed to be a shareholder to operate as a stockbroker, the investment must be regarded as having been made for a property acquired for the purpose of gaining or producing income.

Decision

The appeal is allowed and the matter referred back to the respondent for reconsideration and reassessment in order to permit the deduction of an amount of $3,720.81 as an interest expense from the income of the appellant for the year 1974.

Appeal allowed.